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Final Report Summary - IDEMA (The Impact of Decoupling and Modulation in the Enlarged Union : a sectoral and farm level assessment)

Price-related measures dominated agricultural policies in Organisation for Economic Co-operation and Development (OECD) countries in the 70s and 80s. In the 90s, the European Union (EU) gradually replaced these measures by direct payments. The reform of the Common agricultural policy (CAP) in June 2003 constitutes a further radical change of policies for farm subsidies in the EU. It implemented decoupling of direct payments via a Single farm payment (SFP) per hectare of land, which is independent of the individual farmer's production decisions. The reform intended to make European agriculture more competitive and market-oriented and at the same time provide support to farmers with less distortion on production and trade.

In the public debate preceding the 2003 CAP reform, it was argued that a decoupled SFP would lead to substantial abandonment of production in several regions and sectors and an exodus from the most disadvantaged rural areas. Some farmers' organisations argued that production would shrink and considerable job losses would ensue. It was also claimed that farmers in less favoured regions may risk to be squeezed out as land rents are often below the arable land payment. Landlords may reclaim the land from leaseholders and cash the decoupled payment themselves. Another concern, which has been voiced, is that decoupling will distort the market for previously unsupported products, such as fruits and vegetables.

The choice of approach for the IDEMA project was influenced by two main factors: the radical nature of the reform and the complexity and immensity of the issues to be addressed. The radical nature of the reform implies limited possibilities to generalise from past experiences. Because the reform was implemented after the project started, there were no data available to assess its impacts. Econometric analyses based on historical data, therefore, had only limited possibilities to contribute to answering the questions posed to the project. The project had to rely either on models or surveys of intentions, or both. As the implications of decoupling are multifaceted, no single methodological approach was considered to be able to address all aspects of the issue and a multiplicity of complementary approaches needed to be applied.

The IDEMA project has analysed impacts of decoupling EU agricultural support. Both the 2003 CAP reform and a more extreme Bond scheme, without a link between payments entitlements and land, have been analysed.

Survey and modelling results reveal that the impacts of the 2003 CAP reform are moderate, compared with a continuation of Agenda 2000. There is no strong evidence that farmers intend to drastically change their strategic decision to exit agriculture. In fact, model results indicate that structural change slows down when direct payments are decoupled. One reason is that grassland management becomes an additional income source for farmers. Another finding is that the decoupled payments may reduce farmers' off-farm labour supply. In the New Member States (NMSs), the impact of accession dominates the effects of decoupling; the introduction of CAP payments results in a greater willingness to stay in farming and more competition for land. Increased payments are capitalised in higher land (rental) prices.

A general result is that decoupling in the 2003 CAP reform leads to a small shift from cereals to forage and grass, which were not eligible for direct payments under Agenda 2000 or pre-accession. Some increase of voluntary set-aside area in less productive, high cost regions is also expected. The greatest impacts of decoupling occur in the beef and sheep sectors. Here, the individual Member States' decision to (partially) couple direct payments or use top-ups has a marked influence on beef and lamb supply. Beef and sheep production is sensitive to decoupling in regions with high production costs. Reduced supply of cereals, oilseeds, beef and lamb at the EU level leads to somewhat higher market prices of these products, which mitigates the impact of decoupling on production.

Model results show that a Bond type of decoupled payment leads to a strong increase in average farm size, compared with the 2003 CAP reform. Many farmers leave the sector if off-farm jobs are available, as the decoupled payment is granted to a farmer independent of land or any farming activity (it is only based on historical production). However, in most cases profits per hectare are unchanged or even higher under the Bond scheme, due to significantly lower land (rental) prices and structural change.

The Bond scheme leads to increased abandonment of agricultural land. The impact on livestock production depends to a large extent on the (partial) coupling choices the individual Member States made under the 2003 CAP reform. Livestock production decreases mainly in countries which chose to use coupled beef and sheep payments under the 2003 reform. However, lower supply also means higher product prices. Lower supply of agricultural products due to decoupling changes the net trade position of the EU from a clear net export position to a more neutral situation or even a net import situation.

It can be concluded that the existence of a link between payment entitlements and land is crucial for the impact of a decoupling policy. The decoupling of CAP support in the 2003 CAP reform has a moderate impact on production and may slow down structural change. On the other hand, changing to a Bond type of decoupled payment, which is not linked to land, means much faster structural change and idling of land. However, a Bond scheme tends to increase farm profitability rather than reducing it.

Finally it can be asked whether the results of the IDEMA project indicate that the 2003 CAP reform has achieved its objectives. The question is interesting because the same decoupling principles have been extended to other commodities and, moreover, further decoupling is expected in the 'health check'. The major objectives of the reform were to create a better market orientation, to enhance competitiveness of European agriculture and improve farmers' incomes. As the reform has been implemented, the market orientation has undoubtedly increased and farm incomes improved. A move to a full and uniform decoupling in all regions would improve the situation further but not in any dramatic way. At the same time it can be argued that the objective of improving competitiveness has hardly been archived due to slower structural change, smaller farm size and higher land prices, which all follow from the reform. An implementation of a Bond scheme would constitute a better option from a competitiveness perspective, but this may be difficult to achieve for political reasons.